1 2003-05-10 The Race for FDI in the European Union Lars Oxelheim and Pervez Ghauri Draft of Chapter 1 in European Union and the Race for Foreign Direct Investment in Europe Pervez Ghauri and Lars Oxelheim (eds.) Elsevier (Pergamon: Oxford) Forthcoming 2003 1. Introduction The playing field for foreign direct investment 1 (FDI) changed substantially during the 1980s. During most of the post-WW2 period up to the 1980s, inward FDI were seen with some scepticism. The negative view was often a result of a mistake by governments from inviting only one firm to invest in their country. Despite the fact that the invited company mostly was at the leading edge of technology and management skill the mere procedure 1 A direct investment implies a permanent relationship between the investor and the object, and particularly the opportunity for real influence over the object’s operation. Investments that do not fit the description are to be classified as portfolio investment. The aim of the foreign direct investment according to the IMF definition is to “acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise”. The definition of FDI includes extended trade credits from a parent to its subsidiary, acquisition of shares, loans from parent to subsidiary, a parent’s guarantee of subsidiary’s loan, and self financing over and above the normal consolidation requirement. However, exceptions are frequent. The common view/rule of the practical minimum of equity for having an effective voice in management is a 10 percent ownership. As a general observation, whenever cross-country comparisons are made regarding FDI, attention has to be paid to differences in definitions.